China’s Xi promotes building initiative amid debt worries

President Xi Jinping promised Friday to promote high financial standards for China‘s infrastructure-building initiative as Beijing tries to dispel complaints the multibillion-dollar program leaves developing countries with too much debt.

Xi avoided mentioning debt in a speech at the opening of a Belt and Road forum attended by leaders of three dozen countries to celebrate his signature foreign initiative. But he said Beijing wants “open, green and clean cooperation” with “zero tolerance for corruption.”

Developing countries have welcomed the initiative to expand trade by building roads, ports and other facilities across a vast arc of countries from Asia through Africa and the Middle East to Europe. But most Belt and Road projects are built by Chinese state-owned companies and are paid for with loans from government banks at commercial interest rates. That has fueled complaints most of the benefit flows to China and that costs are too high, pushing some countries into a debt trap.

The initiative launched in 2013 also is fueling political tension with the United States, Russia, Japan and India. They worry Beijing is trying to expand its strategic influence at their expense by building a trade and political network centered on China.

Xi’s government is trying to revive the initiative’s momentum after the number of new projects plunged last year. That came after Chinese officials said state-owned banks would step up scrutiny of borrowers and some governments complained projects do too little for their economies and might give Beijing too much political sway.

Countries including Malaysia and Thailand have canceled or scaled back projects while Ethiopia and others have renegotiated debt repayment.

The president tried to allay complaints about lack of economic benefits and Beijing’s growing power, saying the Belt and Road is “not an exclusive club” and promotes “common development and prosperity.”

Xi also appeared to be trying to dispel worries about possible corruption, environmental damage and other problems by promising Belt and Road will embrace international standards for project development, purchasing and operations.

He noted China issued guidelines Thursday for assessing debt risks to borrowers. The Ministry of Finance said those “debt sustainability guidelines” are based on the standards of the International Monetary Fund and other international institutions.

The audience at a Beijing conference center included President Vladimir Putin of Russia, Prime Ministers Aung San Suu Kyi of Myanmar and Adiy Ahmed of Ethiopia and leaders or envoys from Greece and Malaysia.

Xi said Beijing wants to expand the scope of its initiative by encouraging cooperation on health, water resources, agriculture and technology. He promised scholarships for students from Belt and Road countries.

Chinese lenders have provided $440 billion in financing, the country’s central bank governor, Yi Gang, said Thursday. He gave no details of how much has been repaid or how much might be at risk of possible default.

In addition, some 500 billion yuan ($75 billion) has been raised in Chinese bond markets, according to Yi.

The Chinese debt guidelines are intended to “prevent and solve debt problems,” Finance Minister Liu Kun said Thursday. Countries would be classified as low, medium or high risk borrowers based on economic output per person, economic growth and other factors.

Other governments including the United States and Japan also finance construction in a region the Asia Development Bank says needs $26 trillion of investment through 2030 to keep economic growth strong.

American officials including Secretary of State Mike Pompeo have told countries considering Belt and Road projects to look closely at Beijing’s motives and warned about debt.

Despite that, the number of governments that have signed agreements to support Belt and Road has risen to 115 from 64 in 2013, China says. Beijing scored a diplomatic coup in March when Italy became the first member of the Group of Seven major economies to sign such an agreement.

Belt and Road countries include some of the poorest and most indebted in Africa and Asia.

About one-quarter of the 115 governments that have signed agreements to support the initiative have foreign debt equal to at least 75% of their annual economic output, according to Moody’s. Mongolia is the most extreme at 240 percent, while populous countries including Egypt, Indonesia and Pakistan are above 50%.

None is in immediate danger of default, but Belt and Road economies tend to have higher debt than average, weaker financial flows and more vulnerability to economic shocks, said Lillian Li, a Moody’s vice president.

Borrowing “more external funds will be more dangerous to themselves as well as to the lending countries,” said Li in an interview ahead of the forum.

There is a limit to the scope for change in the initiative because Xi’s government still wants to increase its influence abroad and generate contracts for Chinese industry, Tom Rafferty of the Economist Intelligence Unit said in a report ahead of Friday’s forum.

Beijing could enhance the appeal of Belt and Road by making it more like the World Bank or other multinational organizations, said Rafferty.

“This has the potential to generate further tensions with the U.S.,” said Rafferty.

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